TOP 10 CHALLENGES FOR INVESTMENT BANKS 2016

Blockchain Technology:
Preparing for change

INTRODUCTION

New technologies have radically altered front-office functions for investment banks, bringing unprecedented efficiency gains and new business opportunities.

Yet, despite advancements over the past 20 years, middle- and back-office functions remain mostly antiquated, slow and not very efficient.
Here, firms are still dealing with overly complex procedures involving multiple counterparties, manual processes and third-party service
providers.

During the past year, blockchain technology has rapidly gained traction in the capital markets industry as one of the most exciting technological
developments in recent history. In surveying the global financial technology sector, Accenture has identified blockchains as “possibly the
biggest opportunity from taking an open approach to innovation”. This technology has the potential to help minimize counterparty risk, reduce
settlement times, improve contractual term performance and increase transparency for regulatory reporting.

BLOCKCHAIN-RELATED
VENTURE CAPITAL

SETTLEMENT DAYS

Syndicated Loans

ADOPTION TIMELINE

BLOCKCHAIN TECHNOLOGY

What is blockchain technology?

Blockchain is a disruptive technology platform that uses cryptography and a
distributed messaging protocol to create shared ledgers among counterparties.
Originally, blockchain technology was used by cryptocurrencies whose
popularity gave rise to the idea of blockchains as a means of building
consensus. Since then, banks have begun exploring ways to apply blockchain-distributed
technology to payments. In the context of capital markets, blockchain distributed
ledgers enable open-source, decentralized, replicated, shared and
cryptographically secure operations that are validated by mass collaboration
and can be applied to many financial instruments.

Unlike traditional ledgers in banks, which use central authorities to manage
transactions (see Figure 1), distributed ledgers built on blockchains validate
transactions through a protocol managed by the user community via a
consensus mechanism (see Figure 2). This decentralized approach changes
the power dynamic within the financial system, shifting power from
institutions to users.

Asset transfers can be facilitated without third-party intermediaries through
the use of “smart contracts” – programmed code that replicates conventional
commercial agreements by digitizing business transactions between parties
and validating them through a blockchain. Practically speaking, this means
blockchain-enabled networks have the potential to increase trading efficiency,
improve regulatory control and eliminate unnecessary intermediaries.

Figure 1: Capital markets today

Source: Accenture Research

Figure 2: Capital markets in 2025

Source: Accenture Research

When does blockchain make sense?

Blockchains are most valuable when:

They are used to keep track of complex things.

For example, a swap with multiple parties that has been sold and resold and moved between custodians is often problematic in a traditional back office, but a distributed ledger can accommodate various players. A similar result can be achieved with a properly designed database, but the ledger eliminates power struggles and ensures there is no single point of failure.

How can blockchain help

Though still in the early stages, market players have begun exploring how blockchains can help investment banks. Blockchains can be used to:

Reduce total cost of ownership.

Blockchain stacks offer a robust and verifiable alternative to traditional proprietary stacks at a fraction of the cost.

Clear and settle transactions faster.

Blockchain technology can facilitate the transition from overnight batch processing to intra-day clearing and settlement.

Manage system-of-record sharing.

Blockchain technology makes it possible to give various parties (e.g., clients, custodians and regulators) access to their own live copies of a shared system of record.

Create self-describing electronic transactions.

Smart contracts can use blockchain’s programming language to create context-aware transactions for complex arbitration. For example, a credit default swap could pay out automatically according to pre-agreed logic that watches market data feeds.

What does adoption look like?

2015

Exploration & Investment

Initial capability & use case assessments

Early adoption likely for internal reconciliation

2016-2017

Early Adoption

Leading-edge banks see the value of blockchain and begin deployments for asset classes that are bilaterally traded and/or have no central clearing authority

Regulatory certainty drives adoption for external uses

Regulatory authorities realize the benefits of blockchain for auditing and compliance, and rule-making begins

2018-2024

Growth

Banks begin to see the benefits accorded to early adopters and – combined with regulatory guidance and certainty – the network effect takes hold

New service providers and models emerge

Deployments go viral across numerous asset classes

New products and services are created; incumbent processes and services are discarded

2025

Maturity

Blockchain adoption is considered mainstream and integral to the capital markets ecosystem

Source: Accenture Research

What's the catch?

The use of blockchain technology in capital markets raises a number of unanswered questions in three key areas:

Legal:

How will legal authorities treat automated contracts and digital
assets transferred through blockchain technology? Can ownership of
non-cryptocurrency financial assets be transferred using the distributed
ledger concept with certainty and finality? Will counterparties need to
be identifiable and linked to a legal entity? How will a legal framework
accommodate both smart and traditional contracts?

Operational:

How will assets be transferred between traditional and
blockchain-enabled ledgers? Is a smart contract capable of enshrining
and executing all event functions across an asset’s lifecycle? What role
will oracles play in ensuring the proper execution of smart contracts?
What happens as new parameters potentially impact contracts? How
can ever-expanding ledgers be stored cost-effectively?

Regulatory:

When will regulatory authorities outline acceptable and
best practices for using blockchain-enabled distributed ledgers? Will
regulators treat traditional and blockchain asset transfers differently?
How will blockchain technology affect regulatory reporting
requirements? Will a distributed ledger transaction history suffice for
auditing purposes?

Getting Started

Many firms are in an exploratory phase, testing out the technology in their own technology labs and innovation centers. Despite
numerous technical and regulatory uncertainties, blockchain technology has many possible applications in capital markets. For example,
suggested use cases in testing mode today may include Know Your Customer/Anti-Money Laundering (KYC/AML) data-sharing, trade
surveillance, regulatory reporting, collateral management, trading, settlement and clearing.

Firms that want to assess the viability of blockchain technology for specific financial instruments, such as syndicated loans, should consider a
number of factors, such as anticipated reduction in settlement days, current clearing and settlement costs, digitization potential, product volume,
cost of capital avoided and implementation costs. The next step is to clearly identify risks and challenges. Only then should a firm begin developing
a detailed blockchain roadmap, determining product and asset class adoption and creating an implementation schedule.

CONTACTS

DAVID TREAT

New York

LAURIE MCGRAW

Philadelphia

CLAUS HELBING

Frankfurt

CHRIS BRODERSEN

New York

This content has been prepared by Accenture and is for information purposes. No part of this content may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice.

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